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Merrill downgrades IndiaBulls to bears

April 29, 2008

Merill Lynch has downgraded the price target for IndiaBulls Financial Services by 46% on the back of the sharp earnings cut due to lower loan growth.

Indiabulls’ 4QFY08 earnings, up 56% yoy and 16% qoq were in line with expectations due to lower provisions. However, net interest income growth was lower than expected at 39% yoy and flat qoq. This was, in part, driven by IFSL’s desire to ensure ample liquidity for itself. Hence, it borrowed aggressively during the 4Q. The cash equivalent in the balance sheet is now Rs7.2bn (US$1.8bn) which is almost +40% of the total assets.

Merill is lowering earnings estimates by 46% and 70% for FY09 and FY10 primarily because we are factoring in lower loan growth at 75% (v/s 100% earlier) and +300bps margin pressure as IFSL is more likely to keep a higher share of cash equivalents (that earn a negative spread) on its balance sheet to ensure there are no liquidity concerns.

The stock, trading at 3.3x FY09E book could continue to trade at 3.5x owing to its high ROE (28%), high NPL coverage (critical in this business), earnings growth of +45% CAGR. Merill has set a new price target of just Rs 700.

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